The Bank as Grim Reaper: Debt Composition and Bankruptcy Thresholds

55 Pages Posted: 23 Aug 2016  

Mark Carey

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - International Banking Section

Michael B. Gordy

Board of Governors of the Federal Reserve

Date Written: 2016-07-06

Abstract

We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. Empirical evidence supports this and other implications of the model. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together.

Keywords: Bankruptcy, Credit risk, Debt default, Recovery rates

JEL Classification: G12, G33, G32

Suggested Citation

Carey, Mark and Gordy, Michael B., The Bank as Grim Reaper: Debt Composition and Bankruptcy Thresholds (2016-07-06). FEDS Working Paper No. 2016-069. Available at SSRN: https://ssrn.com/abstract=2828070 or http://dx.doi.org/10.17016/FEDS.2016.069

Mark Carey (Contact Author)

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) - International Banking Section ( email )

20th & C Streets NW
Washington, DC 20551
United States
202-452-2784 (Phone)
202-452-5295 (Fax)

Michael B. Gordy

Board of Governors of the Federal Reserve ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3705 (Phone)

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